Path 2

Path 2

The New Dealer

April 24, 2007

You couldn’t give an opponent much more of a beating than the one Eliot Spitzer handed John Faso last fall. Any worse and you’re talking possible fraud or felony assault charges. When the official tally for the New York gubernatorial race was posted in January by the
state Board of Elections, it showed Democrat Spitzer with just shy of 70 percent of the valid
votes cast, thrashing the hapless Long Island Republican by more than 1.8 million ballots.

Pow! Bam! That’s a mandate, no questions asked. New Yorkers gave the former attorney general a bright green light for the mission he promised during his campaign, the one where he pledged, on “Day One everything changes.” By “everything,” Spitzer made clear on the stump, he meant Albany’s stalled government, its fractured ethics, and the anything-goes approach of the previous 12 years that showered perks and deals on the well-connected.

Which is why many political watchers did a sharp double take when Spitzer’s first big economic-development announcement delivered a potential windfall to a passel of business-as-usual
Republican operatives, a crew consisting of some of former governor George Pataki’s closest cronies, who have aligned themselves with a company desperately trying to shed the taint of past corruption by former officers.

On February 19, just seven weeks after taking office, Spitzer did something even Pataki never worked up the nerve to do, signing a formal letter of support to the U.S. Department of the Interior calling for a controversial new Las Vegas–style casino to be created in the Catskills.

The notion of Catskills casinos has been bandied about for so long it has started to rival Rip van Winkle as a favorite local myth up in the mountains. But after years of government dancing and dallying on the subject, Spitzer’s sudden move was the most concrete step taken so far. And if it comes to be, there’s no question
that there’s a pot of gold waiting for the successful entrepreneurs who will be able to offer gambling-happy New Yorkers a destination that’s at least a half-hour closer than either
Atlantic City or Connecticut’s two gambling spas.

The planned $600 million gaming emporium, to be built on 29 acres at the Monticello Raceway in Sullivan County, would boast 3,500 slot machines, 150 gaming tables, and a 600-seat
nightclub. The proud owner of all this would be the St. Regis Mohawk Indian tribe, whose reservation happens to be about 400 miles north of the site, on the New York–Canada border. This is where the Interior Department comes in: It must approve any off-reservation casinos and take the 29 acres “in trust” for the tribe. That’s a prospect many believe dubious at best—but more on that later.

Dennis Vacco
Frances Roberts

Relations between the St. Regis Mohawks and state government have been tense for years over law enforcement complaints of drug, alcohol, and cigarette smuggling across the border. But unlike the rest of the state, gambling is legal on tribal land, and since the tribe has promised to cut the state in on casino profits, there’s a standing agreement to let bygones be bygones (provided that state taxes are henceforth paid on reservation smokes).

If the arrangement holds up, the Mohawks are poised to get a small piece of revenge for that 400-year-old swindle when the Lenape Indian tribe of Manhattan got taken to the cleaners by some cunning Dutch real estate brokers.

Much closer to Albany’s political heart, however, is the company that is going partners with the Mohawks. Empire Resorts, a publicly traded corporation, is now closer than anyone has ever gotten to winning the most sought- after prize in a generation of state favor-seekers: a Taj Mahal in the old Borscht Belt.

In its pact with the Mohawks, Empire gets the right to handle everything from blackjack tables to hotels, ATMs, and lounge acts—in exchange for 30 percent of net revenues plus a host of other development fees. In a press release after Spitzer’s announcement, the company eagerly promised to deliver a “world-class” casino at the site.

Empire has gotten to this point despite a history of financial scandals involving past officers, allegations of mistreating other
Indian tribes, and the crassest of ties to the Albany old boys’ club that surrounded ex- governor Pataki.

Or is it because of that?

One of those who first heard the casino dinner bell ringing and joined up with Empire’s original incarnation was Pataki’s economic-development czar and top fundraiser, Charles Gargano, who served as a board member and director. Gargano, a former construction executive, was so blasé about his potential conflict of interest as a key player in what was then known as Alpha Hospitality Corporation that it took a 1995 state legislative hearing to embarrass him into stepping down as a director. Even then, Gargano delayed shedding his interest in the company for months, offering contradictory statements about how much stock he owned and what he’d done with it. He instructed aides initially to say that he’d put his shares in a blind trust, and later that he’d sold them. Although he minimized his interest in the company at the time, Gargano recently griped to The New York Times that he lost $625,000 on his $800,000 investment—a figure that doesn’t quite fit the chump-change definition.

Alpha was reorganized into Empire Resorts after it hit some particularly rough water in 2002, when six of its former directors and officers were indicted on federal charges of bank fraud and tax evasion. The charges stemmed from what the feds said was a $100 million swindle of creditors who had backed the businessmen in their takeover of the Days Inn hotel
chain. Alpha was never charged with wrongdoing, but five of its execs were later convicted.

Still unresolved is the case against Alpha’s founder and patriarch, a white South Africa–born hotel mogul named Stanley Tollman. When the charges came down, Tollman decided to hole up in London, out of reach of American laws. The U.S. Attorney’s office in Manhattan considers Tollman a fugitive and has been seeking to extradite him ever since. Tollman’s lawyers insist he’s innocent and that he merely retired abroad around the time of his indictment. But the 76-year-old tycoon has good reason not to want to face the music: His former partner, hotelier Monte Hundley, was sentenced to eight years in prison after conviction; Tollman’s son Brett pled guilty and got a 33-month sentence. Tax fraud charges are also pending against Stanley Tollman’s wife, Beatrice.

Even after Gargano stepped down from Alpha’s board, he remained close to Tollman. The two toured Africa together in Tollman’s jet, and Gargano often flew to Palm Beach with his friend. Although Empire insists that Tollman plays no role in the reconfigured corporation, he still holds an $11 million stake in the company and, as the corporation has stated in disclosure filings to the Securities and Exchange Commission, “there can be no assurance” that regulators won’t look askance at the connections. If so, investors were warned in a 2006 report, “We could lose our gaming licenses or be forced to liquidate certain or all of our gaming interests.”

Tollman’s status in the company also remains a hot potato for state officials. Empire currently operates harness racing at Monticello and has 1,500 video lottery terminals in place. But when the Voice tried to ask the Racing and Wagering Board and the state Lottery Division whether they’d reviewed Tollman’s possible role, officials had conniptions. A top Lottery official promised three times to respond, but never delivered an answer. Racing and Wagering officials went mum, insisting on a freedom-of-information request—and then provided Empire’s SEC filings.

But none of those murky shadows appear to have bothered the stalwarts of Team Pataki who flocked to the casino company in recent years.

Among the current major shareholders in Empire Resorts is a developer who was one of Pataki’s closest allies and biggest campaign contributors. Since 1994, builder Louis Cappelli, along with family members and business associates, has chipped in more than $400,000 in gifts to Pataki and state Republican committees. Cappelli did well in return, winning leases and contracts from the administration. In one embarrassing episode, the Manhattan District Attorney’s Office launched a criminal probe after opposing bidders complained of favoritism when Gargano awarded a Cappelli-tied firm the rights to develop a huge swath of state-owned land at Pilgrim State Hospital on Long Island. No charges were brought, but the deal was scuttled.

Also holding a major stake in the venture are brothers Joseph and Ralph Bernstein. The pair have long been active developers, but have kept a low profile since congressional hearings in 1986 revealed that they had acted as fronts for ex–Philippines dictator Ferdinand Marcos, who plundered his country’s treasury to invest in New York City real estate. In 2001, Joseph Bernstein gave Pataki a $5,000 donation.

Then there are the lobbyists who have been pounding up the capitol steps for the past few years pushing this project ahead.

The leader of the pack is Kieran Mahoney, who managed all three of Pataki’s gubernatorial races. A protégé of former senator Alfonse D’Amato, Mahoney turned to lobbying after Pataki was elected. Records show Mahoney’s
Mercury Public Affairs pulled in $213,000 in lobbying fees since 2004 pressing Empire Resorts’ goals with the governor’s office and the legislature. Mahoney also earned an unspecified amount—such fees often run as high as 25 percent—for placing $220,000 in radio ads promoting the project.

Also lobbying for Empire has been Jeff Buley, the longtime counsel to the state Republican Party. For years, Buley was partners with Albert Pirro, the influential Westchester lawyer
and Pataki ally whose repeated scrapes with the law—including an 11-month prison stint for tax evasion—helped undo a budding political career for his wife, former Westchester district attorney Jeanine Pirro. Al Pirro got his own bite at the casino apple when his friend Louis Cappelli hired his firm as a consultant on environmental remediation near the casino site.

Buley had influence in other ways as well. During the years Buley was on the corporation’s payroll at $7,500 a month, his wife, Cheryl, was a member—and later the $120,000-a-year chairwoman—of the state Racing and Wagering Board, the panel overseeing state racing operations. On his way out the door, Pataki handed Cheryl Buley another patronage plum in the form of a six-year term as a $109,000-per-year member of the state Public Service Commission (where she is currently giving Spitzer headaches by complaining of harassment by other board members).

Then there’s lobbyist Peter Delaney, who has been a Pataki intimate since the ex-governor’s
days as mayor of Peekskill, when Delaney, an aspiring developer, hired Pataki as his broker on a $1 million land deal there. Delaney served as Pataki’s first commissioner of General Services, where he engendered his own controversies when it was reported that he had helped steer lucrative construction contracts in state-leased properties to Cappelli’s companies. Last year Delaney’s lobbying firm, Prostart Inc., was paid $160,000 by Empire, and filings show it continues to rack up fees from the corporation at a clip of $15,000 per month.

Even Spitzer’s old nemesis, former state attorney general Dennis Vacco, is a hired gun for the casino outfit. Vacco, who won election on the GOP ticket with Pataki in 1994, lost four years later in a bitter race to Spitzer, then a neophyte politician. During the campaign, Spitzer savaged Vacco as unethical and incompetent. Vacco, however, quickly re-emerged as an influential Albany insider, first as head of a big trade-waste company, then as a lobbyist. Empire paid Vacco $110,000 last year to promote its cause, and he remains on the payroll at $10,000 per month lobbying the Republican-controlled Senate.

In the Albany spirit of equal-opportunity influence-peddling, Empire also retained a pair of prominent Democratic lobbyists to work the Democrat-controlled Assembly: Brian Meara, a favorite of Assembly Speaker Sheldon Silver, is pulling in $5,000 a month, and another Democrat, Al DelBello, former lieutenant governor under Mario Cuomo, is paid $10,000 a month.

Meara came in particularly handy in 2005 when the company needed to smooth things over with the Assembly after ex–Empire Resorts CEO Robert Berman lost his cool at an Assembly legislative hearing. Berman, a Sullivan County businessman who helped launch the push for casinos in the Catskills, became openly hostile when Brooklyn assemblyman and investigations committee chairman Jim Brennan pressed him about Tollman’s continued interest in the corporation and other concerns. “Do you want to talk about jobs and tax revenues and saving Sullivan County? Or do you want to play 60 Minutes?” Berman testified.

Berman was also questioned about Empire’s
dealings with another tribe, the Cayuga Nation in northern New York. At the time, Empire
was claiming to be partners with the Cayuga, although a majority of the tribe’s leaders had accused the company of financing a fraudulent tribal election that put a pro-casino faction in
power—and then jilting the tribe in the bargain.

“Let’s not worry how an agreement came to be,” Berman shot back. “It was a negotiation like any other negotiation. There’s give and take. Decisions were made. Some are good, some are bad. That’s what it takes to make a deal. OK?”

A few months after the hearing, Berman
was quietly replaced as CEO with a veteran casino executive, David Hanlon, who traveled to Albany to make amends in the Assembly.

As for the Cayuga, attorneys representing five of the eight members of the tribe’s governing body—known as the Council of Chiefs, Representatives, and Clan Mothers—filed a detailed letter with the SEC demanding an investigation.
Empire, the letter alleged, had staged “a naked attempt to overthrow the lawful Cayuga government” by backing a group of dissident pro-casino members.

Cayuga attorney Joe Heath said the SEC failed to take action, but shortly afterward Empire dropped the tribe and cut a new deal with the St. Regis Mohawks.

“I have said for 20 years this casino business is a scandal waiting to happen,” said Heath, a veteran of many upstate gambling battles. “There are millions and millions of dollars to be made if you get one of these up and running.”

So what’s a tough reform Democrat like Eliot Spitzer doing with this reprobate old-guard Republican crew? Why would an ambitious pol who made his mark by zealously hunting down Wall Street miscreants want to give his blessings to this bunch?

The quick good-government answer is Spitzer’s oft-repeated campaign pledge to bring new economic development to ailing upstate regions. “The governor has said that gaming should be a part of an economic-development strategy, but not an economic-development strategy on its own,” says Spitzer spokesman Paul Larrabee.

Ever since the decline of a score of once famed resorts like Grossinger’s where New
Yorkers flocked in the 1950s and ’60s, Sullivan County has fallen on hard times. Budgets for schools and road maintenance are hard-pressed and, aside from state prisons, there are few decent-paying local jobs. Casinos—particularly if the Monticello Raceway resort is just the first of several, as seems likely if approvals can be won—would pump millions into local coffers.

Part of the deal calls for a direct $15 million-a-year injection from the casino to the county government. The local township of Thompson is slated to get another $5 million annually. Although it sounds like a lot, much of that money will be needed to offset increased local expenses for schools, roads, and infrastructure. Still, the county legislature has repeatedly favored the project.

Under the agreement, the state is due a 20 percent share of casino gambling revenues, a figure that rises to 25 percent after four years. State officials declined to estimate what that’s
worth, but by comparison, the state now takes in about $50 million a year from two smaller Indian-owned casinos near Niagara Falls.

There is also pressure for the project from organized labor, which overwhelmingly backed Spitzer last year. In 2005, when Pataki asked the legislature to consider the possibility of five separate Catskills casinos, state AFL-CIO chief Denis Hughes estimated that the plan could generate some 50,000 union-covered jobs. Further fueling organized labor’s casino appetite, the hotel workers’ union reached a tentative agreement with developers and Indian tribes to allow workers at the casinos and attendant resort hotels to win union contracts. (Despite
organizing efforts, Connecticut’s gambling resorts have remained nonunion.)

But another part of Spitzer’s casino calculus—one that’s harder to quantify—is politics. For one thing, there’s the support Spitzer picked up during the campaign from many Pataki diehards. Faso, a former Assembly minority leader and a rock-ribbed fiscal conservative, had every right to expect backing from Republicans who had prospered during Pataki’s 12 years in office. But by the time Faso won the nomination, many of them were either nowhere to be seen or spouting GOP heresy by touting Democrat Spitzer’s talents.

Foremost among the apostates was Alfonse D’Amato, who created Pataki’s candidacy out of whole cloth back in 1994 and remains the single most powerful figure in the state party. As early as May 2006, D’Amato was openly saying that Spitzer would make “a great governor” and that the hard-driving ex-prosecutor was too far ahead in the polls for anyone to catch him.

D’Amato did Spitzer two other solids. He helped drive William Weld, the moderate former Massachusetts governor, out of the race by denouncing Weld’s involvement with a for-profit-college scandal in Kentucky. The Fonz also got his Long Island allies to back Faso at the GOP convention—even though the conservative was widely considered a weak candidate.

D’Amato has his own casino ties. At one point, he represented a rival to Empire Resorts and helped sweet-talk the Mohawks into briefly teaming up with his client (the tribe later defected back to Empire). But while D’Amato has no current public link to the pending development at Monticello, he is so closely connected to the group around Empire and the Mohawks that one top Pataki aide privately referred to the casino plan as “a retirement plan for D’Amato’s people.”

Spitzer also got royal treatment from Republican Jeanine Pirro’s attorney general campaign. Pirro’s TV ads depicted Spitzer as a “fighter” and role model whom she would emulate if elected. The ads made Faso cringe, but there wasn’t much he could do, since the mastermind of Pirro’s campaign was none other than Pataki’s favorite adviser, Kieran Mahoney.

And Spitzer got an early and large contribution from the wife of builder and Empire partner Louis Cappelli. Campaign records show that Kylie Travis donated $25,000 to Spitzer in 2005 (the couple were also among Pirro’s biggest benefactors, pumping $70,000 into her losing campaign).

All in all, by the time Spitzer was ready to consider the casino plan, there were no hostiles on the horizon at Monticello, only friendlies.

Whatever his rationales, the governor’s announcement quickened the hearts of Empire Resorts’ shareholders. The day after Spitzer’s February 19 endorsement, Empire’s stock price jumped from $8 a share to a three-year high of $12. Within days, several Empire directors exercised long-held options to purchase stock, some for as low as $2.12 a share, SEC filings show. The price settled down to about $9 but should have stayed up around $12, according to casino stock analyst Justin Sebastiano of Nollenberger Capital Partners, who has touted the company as “undervalued.”

“There is a lot of money to be made there,” says Sebastiano. “They are going to generate significant revenues.” Once a hotel goes up nearby, the price should go up another $4 to $6, according to Sebastiano. As for the pending approval by the Department of the Interior, “it’s a question of when, not if, ” he says.

Not everyone’s so sure. “This is far from a slam dunk,” says Kathryn Rand, a North Dakota
law professor and gaming expert who is co- director of the Institute for the Study of Tribal Gaming Law and Policy.

Just a week prior to Spitzer’s announcement, Associate Deputy Secretary of the Interior James Cason notified 35 tribes that new rules may sharply limit any approvals of off- reservation
casinos. The letter was similar to one that Cason sent in December to Pataki concerning his agency’s decision to sign off on the environmental aspect of the proposed Monticello casino, issuing a “finding of no significant impact.” But Cason essentially told the governor not to get too excited.

“Governor, please note that we share the concerns that many have expressed about the implications of off-reservation gaming,” he wrote.

Those are also the views of Cason’s boss, Secretary of the Interior Dirk Kempthorne, a former Idaho governor who has been steadfastly opposed to the practice. “I think he’s worried it’s a slippery slope,” said Steven Light, Rand’s co-director at the gaming institute, who counts 50 separate off-reservation proposals now pending. “If Kempthorne says yes to one, there’s a precedent set to sign off on others. Then he has to provide a rationale that the other 49 are different,” says Light.

There’s also a delicate little problem for the Bush administration in the form of Jack Abramoff. The notorious GOP lobbyist and con man hoodwinked casino-seeking tribes out of hundreds of thousands of dollars, something Republicans would rather not remind voters about. “The Abramoff scandal has pretty much colored how Congress and the administration look at this,” says Light.

Another big hurdle is an environmental lawsuit filed in February by the Natural Resources Defense Council and three local groups against the Interior Department. The suit charges that the agency violated its own rules by not compelling Empire and the Mohawks to carry out a full-scale environmental-impact study. The casino is a “massive project that would be out of scale and out of character” with the region, the suit charges, bringing some 6 million annual visitors to a tiny village with a current population of 6,300.

Empire Resorts has been working hard to counter the environmentalists’ claims. Recently the corporation announced that its proposed gambling structures would be the first “green” casino in the Northeast, constructed with “environmentally friendly systems.”

How confident is the company that it’s finally in the home stretch? The question was one of several put to Empire’s vice president for communications, Charles Degliomini. “Sure, let me get some information together and get back to you,” he said. But he didn’t. Degliomini, a longtime D’Amato associate and former co-worker and close friend of Charles Gargano, was not heard from again.